ACG 2071 Exam 2 Chapter 8 Relevant vs irrelevant information for decision making 10 questions 2 are conceptual Relevant Avoidable Costs that are incurred under one alternative but are not incurred they re avoided under the other alternative Irrelevant Relevant Unavoidable costs Costs that are incurred under all alternatives Sunk costs Costs that have already been incurred in the past Opportunity costs The contribution margin foregone by not selecting the next best alternative Incremental revenues Calculation that shows the additional revenue of one alternative over another Incremental costs Calculation that shows the additional costs of one alternative over the other Special orders a customer offers to purchase a large quantity of the company s product but wants to pay a lower amount than normal so the company decides whether or not to accept the order Unless otherwise specified Variable Costs are RELEVANT and Fixed Costs are NOT What are the additional revenues generated and what are the additional costs incurred o If operating at full capacity you must factor in the loss of contribution margin that you have to sacrifice for the special order CE 1 The Beach Company makes beach towels The following info is provided for the production of 10 000 beach towels Selling price per unit Direct materials used Direct Labor Variable factory overhead Fixed Factory overhead Variable admin expenses Fixed admin expenses Assuming there s plenty of excess capacity what would be the effect of accepting a special order for 2 000 towels at a price of 6 per towel 8 12 500 17 300 11 000 7 500 14 000 16 250 If Accept Add l sales Add l costs 6 per towel x 2000 towels 12 000 1 73 DL 1 10 V OH DM 1 25 V Admin 1 40 5 48 per towel x 2000 towels 10 960 It would be a 1 040 increase to income to accept offer Answer D 1 040 increase in income Outsourcing when a company decides if it is more efficient to make or buy a product or service x 300 000 105 000 Make 45 000 DM DL 15 000 V OH 30 000 Total Relevant Costs 90 000 Buy 0 35 It would be 15 000 better to make 1 P a g e Allocating constrained resources delegating the most efficient way to use limited resources You must first find the contribution margin for each activity and divide them each individually by the number of the constrained resource they will require in this case it s the captain hours that is the constrained resource This provides you with the contribution margin per constrained resource captain hours a more accurate way to get you the most bang for your buck essentially Using the CM per Constrained Resource you start with what makes the most and use as many of the total hours you can to reach full demand of that activity Then with the next most profitable activity you do the same and so on until you run out of your constrained resource you definitely will run out at some point that is what makes the resource constrained o o You use every amount of the constrained resource that you can In this case we don t have enough hours to fulfill all of the scuba demand so we only use what we have left over we cannot provide extra hours that do not exist Scuba Diving 30 CM per Excursion Required Captain Hrs 6 5 00 CM per Captain Hrs Island Hopping 40 4 10 00 Fishing 70 8 8 75 1 2 3 Island Hopping 65 Trips x 4 hours 260 captain hours 95 Trips x 8 hours 760 captain hours Fishing 1 200 captain hours available Scuba 1 020 captain hours used 180 hours remaining 6 hours per scuba trip 1 020 captain hours 30 trips Keeping vs eliminating operations finding the impact on operating income if an aspect of the business is eliminated and using that information to determine if it is more valuable to keep or eliminate that operation Remember Direct Fixed Costs are AVOIDABLE Common Fixed Costs are UNAVOIDABLE If the Island Spa Health Club is eliminated Lost sales revenues Variable cost savings Fixed cost savings direct fixed expenses Impact on operating income Sell as is vs process further when a company decides if it is more financially efficient profitable to sell a Impact on Op Income 255 000 195 000 40 000 20 000 current product as it is or if it would be better to process it further Remember Processing further will provide for higher revenue but will also have to endure additional costs that need to be accounted for If the spa is eliminated they will be 20 000 worse off If the Sunset Cruise is turned into a Dinner Cruise Add l sales revenue 75 50 Dinner sale price Sunset sale price Add l costs 55 33 Dinner unit costs Sunset unit costs Add l Profit Total Additional Profit 25 22 3 x 35 000 customers 105 000 2 P a g e t e g d u B g n i t a r e p O Sales Budget Production Budget Direct Labor Budget DM Purchases Budget S A Expense Budget Manufacturing OH Budget 14 questions 5 are conceptual Chapter 5 Budgeting in general an operating plan that is expressed primarily in financial terms Each component of the master budget Sales Budget the starting point of the master budget because often other components of the master budget Budgeted Income Statement Ending Inventory and COGS Budget Budgeted Balance Sheet Cash Budget February 1 600 x 25 00 40 000 March 1 900 x 25 00 47 500 Quarter 5 000 x 25 00 125 000 are based on the estimated volume of sales Budgeted of Goods x Budgeted Average Sales Price January 1 500 x 25 00 37 500 Budgeted Sales Revenue Flows to the budgeted income statement h s a C t e g d u B a m r o f o r P l a i c n a n i F s t n e m e t a t S Selling Administrative Expense Budget includes expenses required for selling the product and managing the business such as advertising insurance accounting legal services etc Total all of the Selling Administrative expenses together for each period or quarter and that total flows to the Budgeted Income Statement 3 P a g e Production Budget calculates the volume of goods that needs to be produced each month Budgeted Sales Budgeted Ending Inventory Budgeted Beginning Inventory Budgeted Production Direct Materials Purchases Budget calculates the budgeted amount of direct materials that need to be purchased can only be done after monthly production has been budgeted Budgeted Ending Inventory Budgeted Beginning Inventory Production Needs Budgeted Purchases Direct Labor Budget the budgeted amount of direct labor cost depends on the budgeted number of hours required to produce each unit and the budgeted hourly rate x x Manufacturing Overhead Budget the budget for all other manufacturing costs Total Direct Labor Required in hours
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